Steven Cook, the Council on Foreign Relations’ main expert on Egypt, posted an inaccurate and unprincipled attack on me today at the CNN “Global Public Square” blog.

“An objective observer,” Dr. Cook writes of Egypt’s present crisis, “might come to the reasonable conclusion that Egypt needs help and that the international community should do what it can to help pull Egyptians back from the brink. That is certainly the view of most analysts from across the political spectrum, yet in one corner of the commentariat [namely mine], they are actually hoping for Egypt to fail.”

On the contrary: I believe that the foreign policy establishment (including Dr. Cook) is engaged in a hapless and counterproductive effort to save the unsalvageable. That is my assessment as a specialist in country risk with thirty years’ experience, including a stint as Bank of America’s global head of bond research. I never wrote that an Egyptian collapse was desirable, only that it was inevitable. I might be wrong, but this week’s events in Egypt surely do not make me look wrong.

Dr. Cook refers specifically to my Jan. 22 essay, “Denial still is a river in Egypt,” in which I argue that Egypt’s economic collapse has made the largest Arab state ungovernable. He denounces as “a-historic revisionism” my “claim that economic collapse was the reason for the uprising.” Revisionism? I have been arguing since February 2011 that the global spike in food prices undermined Egypt, which imports half its food. I wrote back then:

Even Islamists have to eat. It is unclear whether President Hosni Mubarak of Egypt will survive, or whether his nationalist regime will be replaced by an Islamist, democratic, or authoritarian state. What is certain is that it will be a failed state. Amid the speculation about the shape of Arab politics to come, a handful of observers, for example economist Nourel Roubini, have pointed to the obvious: Wheat prices have almost doubled in the past year.

Since then I have chronicled the unfolding economic and political breakdown in Egypt in more than two dozen essays. And here is what Egypt’s leading daily al-Ahram wrote yesterday:

On 25 and 28 January 2011, thousands chanted “Bread” on streets across Egypt, highlighting the economic nature of the uprising. The chant represented the people’s aspirations for a fairer economic system, protesting high inflation rates, low wages and the unavailability of daily rations. It is no coincidence that bread was the first word of the revolution’s main slogan (“Bread, freedom, dignity”), as it is a daily staple for millions of people, making Egypt the largest per capita wheat consumer and importer.

Egypt’s Defense Minister Gen. Abdul al-Sisi warned this morning that state failure was a possibility:

The continuation of the struggle between political forces and their disagreement over the administration of the country may lead to the collapse of the state and threaten the future of upcoming generations.

That is precisely what I warned about two years ago. Dr. Cook ignores my early and accurate forecast of the present crisis. Just at the point where Egypt’s most influential newspaper and its defense minister echo my longstanding analysis, Dr. Cook wants to change the subject. He accuses me of holding absurd views that I never expressed:

What we have here is nothing more than a crude lament that the United States did not give Mubarak a so-called “green light” to crack down two years ago. This is revealing for what Spengler/Goldman does not know about Egypt, its history, and the causes of Hosni Mubarak’s fall, but everyone is a Middle East expert these days. Even if President Obama had signaled that there would be no penalty for an Egyptian version of Tiananmen, it would not have been forthcoming.

In fact, I wrote just the opposite, namely that Egypt would become a failed state whether or not Mubarak hung on. As a practical matter, I think that the United States made a mistake by issuing a peremptory order that “Mubarak must go,” in February of 2011. Mubarak was a longstanding American ally and the United States should have eased the transition as a matter of loyalty. Never did I suggest that a Mubarak crackdown on the protesters would have solved the problem.

My review of Prof. Jon Levenson’s superb new book Inheriting Abraham appears this morning at the Jewish webzine Tablet. Levenson, who holds the main chair in Bible at Harvard Divinity School, has produced a series of indispensable books, including a joint volume with the Catholic theologian Kevin Madigan on resurrection. He doesn’t disappoint this time. The new book debunks the idea popular in liberal religious circles that Christians, Muslims and Jews can hold hands and sing Kumbaya around the campfire by virtue of our common Abrahamic heritage. As I wrote,

In Inheriting Abraham, Jon Levenson, the Albert A. List Professor of Bible at Harvard’s Divinity School, throws cold water on the mutual-understanding campfire. Misunderstanding is not what divides the image of Abraham in Judaism, Christianity, and Islam, the misnomered “Abrahamic religions”; on the contrary, the founders of the younger religions well understood Abraham’s role in Judaism. St. Paul’s transformation of Abraham into the father of all who believe, and the Quran’s recasting of Abraham as a Muslim prophet who prefigured Muhammed, both rejected the Jewish version by design, by inventing their own Abrahams to serve their own doctrinal purposes.

Abraham is something of an afterthought in Islam; he is not the father of God’s people in the flesh (Judaism) or in the spirit (Christianity), but a mere placeholder for Mohammed, an earlier prophet of monotheism. Levenson explains brilliantly and lucidly how Jews and Christians understand Abraham and each other. His account of Islam leaves no doubt that the later religion is doing something entirely different. Again, from my review:

Midway through the book, the reader encounters this astonishing question: “Why are Jews, Christians and Muslims not sacrificing their beloved sons? Why are so few Muslims engaged in mass murder à la Sept. 11 suicide bombers?” Levenson implies here that jihad, including its manifestation in terrorism, is a mode of sacrifice in Islam—the spiritual heir of the binding of Isaac. That is not a new thought. As the great German-Jewish theologian Franz Rosenzweig put it, “Following the path of Allah means in the narrowest sense propagating Islam through holy war. In the obedient journey upon this path, taking upon one’s self the associated dangers, the observance of the laws prescribed for it, Muslim piety finds its way in the world.”

….

So, if death in jihad is the Muslim equivalent of the sacrifice of the beloved son in Judaism and Christianity, one understands why it continues to shape life in Muslim countries and in countries where Muslims live. The National Counterterrorism Center lists 79,766 terrorist attacks globally from 2004 through 2011 with 111,774 dead and 228,317 injured, almost all by Muslims. Although a tiny minority of the world’s 1.3 billion Muslims takes part in jihadist terrorism, such sacrificial acts have a solid doctrinal foundation in the faith. A majority of respondents to a 2011 Pew Center survey in Egypt, Lebanon, and the Palestinian territories said that suicide bombing against civilians was sometimes justified.

I wish Levenson had drawn out the implications of his insights into Islam in the same detail he accorded Judaism and Christianity. It is a magisterial book, with this lacuna. Emphatically recommended. Read the whole review here.

[Not to belabor the point, but the reason that the Obama administration gets away with an outrageously wrong foreign policy in the Middle East is that the Republican mainstream shares the premise of his foreign policy: the US must find a solution that is good for everyone in the region, that Muslim democracy arising from the Arab Spring is the region's great hope for peace and stability, and that a democratically-elected government is prima facie a good government. This dogma was part of the reason we Republicans lost the last two presidential elections, and why George W. Bush doesn't show his face in public. Republicans who don't sign off on this utopian view are demonized, for example, the estimable Michelle Bachmann. I signed the petition to support Rep. Bachmann circulated by Caroline Glick at frontpagemag.com and I urge all my readers to do the same. I think Rep. Bachmann should spend less time worrying about low-level Muslim Brotherhood operatives in the State Department and more time bashing her Republican colleagues for voting aid money to Mohamed "apes-and-pigs" Morsi, but that's a quibble among friends].

Denial, it turns out, really is a river in Egypt. I refer not to the world’s longest waterway, but the world’s largest outpouring of pious expressions of confidence in Egypt by American and European politicians. Infusions of real cash, to be sure, could delay Egypt’s deterioration into a failed state, but not by long, because the country requires more than US$20 billion a year simply to meet its basic needs, and Western governments will not provide that much money.

As Egypt’s foreign exchange reserves dipped below what the central bank called a critical minimum and the country’s currency began sinking, the country cut imports of essentials such as oil earlier this month. Reuters reported January 8, “State-owned Egyptian General Petroleum Corporation (EGPC) has only purchased 3 million barrels of crude oil for the first quarter of this year, half of what it was seeking in a tender, traders said. That content tender was already considered insufficient to supply Egypt’s refineries, even at reduced running rates. ‘Of course it’s not enough, they need more – but no money,’ a trader, active in the East Mediterranean oil market said.”

Even before government cut back oil imports by half, 15 Egyptian power stations, representing more than a tenth of the country’s installed capacity, had stopped generating power, the daily al-Ahram reported December 28.

Egypt is running out of everything, except well-wishers from the Western foreign policy establishment, for which the Arab Spring has been a humiliating proposition. After a year of attempts to reinforce the Sunni opposition in Syria, the West is left with an insurgency dominated by radical jihadists, and an Assad regime that continues to draw support from minorities who fear the Sunnis even more than they fear Assad. In Libya, the US helped overthrow Colonel Muammar Gaddafi, and for its trouble got a dead ambassador and roving bands of terrorists equipped with the best of the Libyan arsenal.

No nation the size of Egypt has become ungovernable except as a result of war during the whole of the modern period. The deterioration of the Arab Spring into societal breakdown constitutes a reproach to the Western foreign policy establishment, which could not envision this outcome before, and refuses to consider its consequences now.

The closer Egypt comes to chaos, the shriller the expressions of solidarity with Cairo from Western leaders. The discovery of a 2010 video of President Mohammed Morsi denouncing Jews as “descendants of apes and pigs” came at an inopportune moment. The least of the problem is that Morsi hates Jews; no-one suspected him of any other sentiments. The trouble is that the speech exposes Egypt’s president as a pre-modern creature of barbaric habits of thought and Dark Age ignorance – hardly the man to execute the most difficult operation that the leader of any troubled economy has been asked to accomplish in the recent record of economic disaster.

Western leaders have a story, though, and they are sticking to it. European Union President Herman Van Rompuy was in Cairo last week, along with a delegation of American lawmakers led by senators John McCain and Lindsey Graham. The European leader promised $6.7 billion in loans and investments, provided that Egypt sign the agreement with the International Monetary Fund that it has been unable to close for the past year.

Even Bill Gates has gotten involved, as part of a consortium of US investors buying a $1 billion stake in the Egyptian cement and construction firm Orascom. The whole of Egypt’s stock market is worth about as much as a middling member of the S&P 500, on par with American Express or 3M, which is about all one needs to know about the valuation of an economy with 80 million citizens.

Money is what Egypt needs, in mushrooming quantities. Egypt’s import bill has tripled since 2006, mainly because the cost of its most important commodities – food and energy – rose drastically. Its exports, meanwhile, remain a fifth below the 2008 peak due to endemic shortages of electricity and other essentials. Tourism, the country’s biggest source of foreign exchange, has dropped by about half.

That is why the Hosni Mubarak regime collapsed when it did. Asia’s fast-growing economies crowded Egypt out of the world market for commodities, bidding up the price of food and energy to the point that the impoverished Egyptian economy could not afford necessities. Western politicians don’t seem to grasp the magnitude of the problem. On January 14, the European Union’s Van Rompuy “stressed the need for Egypt to achieve economic growth rates on par with pre-revolutionary growth, as this would help combat Egypt’s high unemployment rates,” al-Ahram reported. The trouble is that the collapse of economic growth provoked the revolution.

The country’s trade deficit was running at an annual rate of nearly $42 billion as of November 2012, before the central bank allowed the Egyptian pound to sink on foreign exchange markets. That’s 15% of Gross Domestic Product, a startling amount (the government’s budget deficit also stands at around 15% of GDP. Against this $50 billion, Egypt can expect to earn perhaps $6 billion from tourists and $4 billion from the Suez Canal, and take in perhaps $15 billion in remittances from Egyptian workers overseas. That is dicey, because devaluation prompts workers to postpone remittances to a declining currency. In the best case scenario Egypt will need nearly $20 billion for imports during 2013. The money isn’t there.

For most of the past year, Egypt has been negotiating for a $4.8 billion loan from the International Monetary Fund, which is supposed to open the door for additional loans, for example, some $6.7 billion in “loans and grants” from the European Community – although a fraction of that money, even if committed, will be spendable during 2013. But the government of Mohammed Morsi does not have the political authority to demand painful sacrifices from a population whose lower half suffers from extreme privation.

As part of the loan package, The International Monetary Fund wants Egypt to cut its budget deficit to just 8.5% from about 15%, almost entirely by reducing energy and food subsidies. That is a reduction of government spending by the equivalent of 6% of GDP in a matter of months – the rough equivalent of a trillion-dollar one-time cut in public spending in the United States. That would impose extreme hardships on the half of Egypt’s population living on less than $2 a day. Although the present subsidy system is unwieldy and inefficient, the likelihood that Morsi’s Islamist government could introduce effective subsidy reforms by next summer is vanishingly small.

Instead of acceding to IMF conditions, Morsi has adopted the usual dodge of weak governments, that is, currency devaluation and exchange controls. Egypt’s pound has lost about 10% of its value during the past month, which will be reflected in higher prices for essentials during the next several weeks. Egyptian companies, meanwhile, can withdraw no more than $30,000 per day.

Egypt’s Pound Falls by 10%

Source: Central Bank of Egypt

Egypt’s cash position is even worse than it appears. The $7 billion or so in the central bank’s liquid cash reserves does not take into account the billions of dollars that Egyptian importers owe to unpaid suppliers. Nor does it take into account new obligations that Egypt has had to assume to get cash up front. Qatar lent Egypt $2.5 billion, all of which appears to have been spent defending the Egyptian pound on the foreign exchange market. It appears that Egypt will have to pay off the Qatari loan by purchasing natural gas from Qatar at inflated prices.

“The import price [for Qatari natural gas] is expected to reach US$14 per 1 million thermal units…The Egyptian government exports gas to Jordan at $5.50 per one million units, while Qatar exports it at more than $9,” the Egypt Independent reported December 17. It seems that Qatar is getting its money back by charging Egypt double for natural gas.

The discovery of Morsi’s apes-and-pigs comment might have provided a pretext for America’s Republican Party to wash their hands of the Egyptian president and shift the blame for the entire mess onto the Obama administration. Such is the loyalty of the Republican mainstream to the so-called freedom agenda of the former Bush administration, though, that Republican leaders have gone out of their way to declare their solidarity with Cairo.

Senator McCain declared January 17:

Among our group here, Democrats and Republicans, there is plenty that we disagree about. But when it comes to Egypt, we largely speak with one voice…We all believe in the continued importance of the US-Egypt relationship. We were all early supporters of the peaceful aspirations of the Egyptian people that inspired your revolution nearly two years ago – for democracy, for economic opportunity, for the protection of justice and human rights under the rule of law.

And we have come to Cairo with one major message: For us in the United States, especially in the Congress, the promise of Egyptian revolution is the opportunity is has presented us to recast our relationship with Egypt – to make it a truly strategic partnership between our peoples, our nations, and our elected governments, not one that rests narrowly on one person or one party.

…In our meeting with President Morsi, we voiced our strong disapproval of statements he made a few years ago that have recently surfaced. We had a constructive discussion on this subject. We leave it to the President to make any further comments on this matter that he may wish.

How one conducts a “constructive discussion” with someone who believes that Jews are the descendants of apes and pigs is a matter we will leave to Senator McCain’s memoirs, if ever they appear. President Morsi’s paranoid ravings are sadly typical of Egypt’s pre-modern backwardness – its 45% rate of illiteracy, its 90% rate of female genital mutilation, its 33% rate of consanguineal marriage – that make it a money sink unable to adapt to the shifts in the global market during the past several years.

American policymakers of both parties bring to mind the tolerance of the enamored millionaire Joe E Brown at the end of Some Like It Hot. After the manifestly anti-American Muslim Brotherhood displaced the “tech-savvy activists” of Tahrir square; after Mohamed Morsi dismissed Americans friends in the Egyptian military in August; after Morsi allowed two days of rampages against the American Embassy in Cairo following the Benghazi incident; and after Morsi himself was exposed as a paranoid clown in the 2010 video, we hear an echo of Joe E Brown’s response to the news that his intended bride is really a man: “Nobody’s perfect.”

It is hard to imagine what might change the narrative in the Republican mainstream. After falling on its collective sword for the Bush freedom agenda in two lost presidential elections, the Republican leadership cannot distance itself from its past errors without taking early retirement.

A number of commentators have drawn a parallel between Israel’s national elections on Tuesday and the formation of a national unity government just prior to Israel’s preemptive attack on Egypt in June 1967. Despite stern warnings to the contrary from the Johnson administration and being at mortal risk, Israel won the Six-Day War. The decision to strike was preceded by weeks of anguished debate. Prime Minister Binyamin Netanyahu is expected to form the equivalent of a national unity government after the elections, with the moral authority to strike Iran.

A great gulf is fixed, though, between the Cold War environment of 1967, when the U.S. feared an escalation of a Middle East conflict into a global confrontation with the Soviet Union, and the world of 2013, where America’s competitors have a marginal role in the Middle East. The Johnson administration feared that Israel might upset its Cold War calculus and give advantage to Russia. To some extent those fears were realized (Egypt’s turn toward Russia culminated in the 1973 attack on Israel), but the advantage that America drew from its alliance with the region’s strongest power more than outweighed other considerations. What does the Obama administration have to lose from an Israeli strike on Iran today? Nothing, it would appear, except its own illusions. It is much easier for Israel to disregard American warnings today than it was in 1967. Lyndon Johnson was genuinely sympathetic to Israel but concerned about spillover into the Cold War. Obama has nothing to lose but his illusions.

Assuming the January 22 Israeli elections will be followed by some three to six weeks of negotiations on the formation of the country’s next governing coalition, Israel’s new government will be sworn in sometime between mid-February and mid-March 2013. By that time, the decision making environment surrounding Iran’s nuclear efforts is likely to be affected by two vectors: One is the expected further evolution of Iran’s nuclear program. The other is the likely efforts of the United States to reach a negotiated resolution of the nuclear conflict with Iran.

If the pace of Iran’s uranium enrichment activities are projected into the next six to nine months, by late spring or early summer 2013 Iran will likely possess enough uranium enriched to 3.5 percent and 20 percent to allow the construction of some 2–3 bombs within 2–3 months of a decision to do so being taken. At that point, Israeli leaders will become uncertain about the extent to which the difference between a nuclear-capable and nuclear-armed Iran will remain relevant. Even the more cautious, balanced, and level-headed among the Israeli defense and intelligence chiefs will then become very nervous, as so much would then rest on the ability to detect the decision of Iran’s supreme leader to order the production of nuclear weapons.

But a prospective Israeli strike against Iran will run into a buzz-saw of opposition from the Obama administration, Feldman adds, which will undertake:

…a heroic U.S.-led effort to negotiate a grand bargain with Iran to prevent it from “going nuclear.” This effort will be motivated by the Obama administration’s assessments that following the lengthy wars in Iraq and Afghanistan, the United States is war-weary; that even a limited military strike against Iran’s nuclear installations might escalate, requiring another major U.S. military commitment in the Middle East; and that given the state of the U.S. economy and that of the national economies of America’s principal trading partners, a military attack aimed at preventing Iran from obtaining nuclear weapons may prove too costly. Given their positions on this issue, the recently announced nominations of senator John Kerry and former senator Chuck Hagel as the next U.S. secretaries of state and defense, respectively, point to this likely effort.

Feldman’s summary is accurate, but dispiriting: the stakes for the United States are trivial today compared to the risks in 1967 at the height of the Cold War.

After betting the foreign-policy store on the Muslim Brotherhood as the new wave of Arab democracy in the Middle East, the Eastern Establishment and the Obama administration seem ready to cut their losses. Syria already is a failed state — no alternative government can replace the odious Basher al-Assad, and Assad cannot reunify the country — and Egypt is a failed state in waiting. The latter observation should have been obvious to anyone with a pocket calculator.

It’s no news that Mohamed Morsi’s Muslim Brotherhood is an extremist, anti-Semitic monstrosity. The disgusting eruption of Jew-hatred from Morsi in 2010 is nothing new. What is new is the fact that the Obama administration and the New York Times are shocked — shocked — to discover the Morsi is a rabid Jew-hater. The Timeswrote today:

Egyptian President Mohamed Morsi’s scurrilous comments from nearly three years ago about Zionists and Jews, which just came to light, have raised serious doubts about whether he can ever be the force for moderation and stability that is needed. That kind of pure bigotry is unacceptable anywhere, anytime. But it is even more offensive in public discourse, coming from someone who became the president of a major country.

The sad truth is that defaming Jews is an all too standard feature of Egyptian, and Arab, discourse. Teaching children to hate and dehumanizing one’s adversaries is just the kind of twisted mentality that fuels the conflicts that torment the region.

Obama’s top intelligence people have been assuring us that the Brotherhood is a moderate, secular, heterogeneous organization and a prospective American partner, for example, Director of National Intelligence James Clapper last year. Republican congressmen like Michele Bachmann who objected to administration coddling of the Brotherhood have been vilified as extremists by the mainstream of their own party. On the strength of a 2010 video tape long known to specialists, the establishment has suddenly discovered that this moderate, secular organization is a nest of Jew-hating vipers.

Attorney General Eric Holder, some observers suggest, qualified himself for the nation’s top law enforcement position by ramming through a presidential pardon for fugitive tax cheat Marc Rich in the final hours of the Clinton administration. A lawyer who will take the blame for one of the ugliest acts of political patronage in memory (Rich’s ex-wife spread around a lot of political donations to Democrats) will do just about anything for his client, in this case President Obama. Those kind of principles (“If you don’t like them, I’ve got others,” as Groucho said) have their uses for a certain kind of client.

By the same token, Jack Lew’s senior position at the epicenter of financial meltdown in 2008 — he was chief operating officer of Citigroup Alternative Investments, the bank’s hedge fund vehicle — qualifies him to be Treasury secretary in an administration that uses the federal budget as a political piggy bank. A number of press commentaries have questioned the wisdom of giving the nation’s top financial job to an official associated with the worst acts of incompetence of the financial bubble. The Washington Postreported Jan. 10:

The beginning of 2008 was a brutal time to be working at the bank and certainly at Citigroup’s alternative investments unit, which managed more than $54 billion.

The group was hemorrhaging money just as Lew joined. In the first three months alone, it lost $509 million, according to SEC filings. By contrast, just a year earlier during that quarter, the unit made $222 million.

“He stepped into the hedge-fund buzz saw,” said Mark Williams, a lecturer in finance at Boston University and a former bank examiner for the Federal Reserve. “His timing wasn’t the best.”

Things continued to deteriorate the rest of the year. More than 50,000 employees, or one-seventh of Citigroup’s global workforce, were laid off in November. That year, the stock price dropped about 75 percent. Lew, meanwhile, was paid at least $1.1 million in 2008, according to financial disclosure statements.

By the end of December 2008, Lew had lined up a new job: away from Wall Street and back in Washington as a deputy secretary of state under Secretary Hillary Rodham Clinton.

Meanwhile, Citigroup’s alternative investments unit had become such a stain on the bank’s record that it was relaunched three years ago with a new name. It’s now known as Citi Capital Advisors.

The newspapers don’t know the half of it. I was there, and I know what Jack Lew was up to.

By rights, Jack Lew should be unemployable on the strength of his resume, except for one thing: As J.M. Keynes said, “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” If we start assigning blame for the 2008 financial crisis, who knows where it will end? At a post-election soiree sponsored by The New Criterion magazine, Weekly Standard editor Bill Kristol observed that voters were more likely to blame George W. Bush than Barack Obama for the crisis. Given that no “mainstream Republican” institution anticipated the crisis, Kristol added, the voters hardly can be blamed.

A few Republicans, to be sure, were screaming about the impending crisis: I warned about a trillion-dollar asset bubble on the books of the banks on Larry Kudlow’s TV show in July 2007, and repeated that warning in numerous venues, including an appearance just before the Lehman Brothers’ failure on Bloomberg radio in July 2008. The mainstream Republicans didn’t want to hear about it, for three reasons. The first is that the Bush administration had checked all the right boxes on their ideological list (and the Bush tax cuts were good as far as they went), and few Republicans understood anything about finance. The second is that too many Republicans were making too much money from the bubble, notably Newt Gingrich, who earned about $1.6 million from the federal mortgage lender Freddie Mac for deflecting conservative criticism. And the third is that to understand why the bubble emerged, one would have to understand deep structural weaknesses in the world economy that we Republicans, with our booster mentality, don’t like to think about.

I tried to explain the crisis in May 2007, while it was unfolding, in an essay for Asia Times Online:

It is fashionable these days to blame the Americans for borrowing instead of saving. In effect, Americans borrowed a trillion dollars a year against the expectation that the 10% annual rate of increase in home prices would continue, producing a bubble that now has collapsed. It is no different from the real estate bubble that contributed to the Thai baht’s devaluation in 1997, except in size and global impact.

The monster is not the financial system, crooked and stupid as it may have been. The monster is the burgeoning horde of pensioners in Germany and other industrial countries. It is easy to change the financial system. The central banks can assemble on any Tuesday morning and announce tougher lending standards. But it is impossible to fix the financial problems that arise from Europe’s senescence. Thanks to the one-child policy, moreover, China has a relatively young population that is aging faster than any other, and China’s appetite for savings vastly exceeds what its own financial market can offer.

There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear.

The world kept shipping capital to the United States over the past 10 years, however, because it had nowhere else to go. The financial markets, in turn, found ways to persuade Americans to borrow more and more money. If there weren’t enough young Americans to borrow money on a sound basis, the banks arranged for a smaller number of Americans to borrow more money on an unsound basis. That is why subprime, interest-only, no-money-down and other mortgages waxed great in bank portfolios.

America’s financial market could not produce enough pork chops, so the Europeans bought Spam and scrapple. America’s rating agencies assured them that derivatives created from subprime mortgages, second-lien mortgages and other dubious parts of the pig were the equivalent of pork chops, and foreign investors wolfed them down. Humbug and duplicity as I argued in The devil and Alan Greenspan (Asia Times Online, October 2, 2007), regulators, bankers and investors all looked the other way, and now all point the finger at each other.

The grandfather of supply-side economics, Nobel laureate Robert Mundell, first explained that demographics caused all the great current account imbalances in history, in an 1989 journal article. No-one else seems to have read Mundell’s work, let alone absorbed its implications — surely not the Weekly Standard. We Republicans don’t like to think that a great deal of what we mistook for American economic dynamism since the mid-1990s was in fact a bubble fueled by $6 trillion in foreign capital inflows between 1998 and 2007.

American leaders bring to mind the last Abbasid Caliph, who made no preparations for the approach of the Mongols in 1258. What, asked al-Musta’sim Billah, could Mongol arrows do to the walls of Baghdad? When the Mongol commander Hulagu Khan arrived on January 29, though, he had with him 1,000 Chinese bombardiers, as well as Persian, Turkish and Georgian auxiliaries.
Historians disagree as to whether the Mongols used cannon or counterweighted catapults, but in any case the bombardment breached the city’s walls within three weeks, and they proceeded to slaughter between 200,000 and a million of its inhabitants. There are various accounts of how al-Musta’sim died, some quite colorful.

Like the Abbasids, Americans have no idea what is about to hit them. We are a disruptive, bottom-up economy driven by entrepreneurship, and we look with contempt at China’s clumsy, top-down model. The trouble is that we haven’t done much innovation since the 1980s. A new generation of well-educated and eager Chinese may assimilate our past innovations and pass us by.
As a culture, to be sure, the Mongols had no capacity for technological innovation. They didn’t need it. After they conquered Persia, the source of the best available siege technology in the 12th century, the Mongols employed Persian catapults hurling 100-kilogram missiles to reduce the walls of Chinese cities. By the time they turned their attention to Mesopotamia, they commanded Chinese technology as well. China, of course, was the great technological innovator of the age. Between 800 and 1200 CE, it invented gunpowder, firearms, explosive bombs, moveable type, and the magnetic compass.

China’s inventiveness ended after the Mongol conquest, and the European powers who began their industrial development with borrowed Chinese technology humiliated the Middle Kingdom. China’s dirigiste economy remains ill-suited to innovation. Like the 13th century Mongols, though, the Chinese don’t need to innovate. They simply need to assimilate available technologies. China’s multi-trillion-dollar bid for foreign technology is the most important change in world investment patterns since America’s great wave of innovation of the 1980s.

A case in point is the transfer of nuclear power plant technology – once the crown jewel of American engineering – to Japan with Toshiba’s acquisition of Westinghouse, and by Toshiba’s license to China. Toshiba-Westinghouse and China’s State Nuclear Power Technology Corporation announced a joint venture last year to develop a state-of-the-art pressurized water reactor based on Westinghouse technology. China plans to export the reactors globally.

According to Professor Yiping Huang of Peking University, writing in the September 2012 issue of East Asia Forum, what we have seen to date is only the beginning:

Chinese outward direct investment is a relatively new phenomenon. In 2002, the first year after China’s accession to the World Trade Organization, China’s total ODI [outward direct investment] was less than US$3 billion. By 2010, however, it had already increased to more than 20 times this amount. According to forecasts by economists at the Hong Kong Monetary Authority, if China does liberalize its capital account, Chinese ODI stock could rise from US$310 billion in 2010 to US$5.3 trillion by 2020. If this prediction turns out to be correct, then China may well become the world’s largest outward direct investor by this time.

To put this enormous number in context: US$5.3 trillion in overseas direct investment by China during the next seven years is roughly equal to the last three years’ worth of private nonresidential fixed investment in the United States. Not all of this will acquire technology, to be sure. There isn’t $5 trillion of tech companies worth buying. A great deal of China’s foreign investment will reflect portfolio diversification by individual Chinese, who still cannot acquire foreign assets directly, and much of it will buy raw materials.

Most American China watchers mistook a house-cleaning last year for a crisis. China’s economy seemed to stall, with exporters idling their factories and property prices falling. For a few months early in 2011 it seemed that Chinese industrial production might even be shrinking. In fact, the Chinese Communist Party deliberately cut off credit to less-efficient private manufacturers.

Nothing in China is ever quite private; the dependence of private entrepreneurs on the state is such that some state participation is always present. That is an invitation to corruption and inefficiency, and the Communist Party decided to concentrate resources on large state-owned enterprises in order to keep its friends close and its enemies closer. The short-lived credit crunch was a kind of anti-corruption campaign. [1]

That explains why large-capitalization Chinese companies – almost all of them state-controlled – performed so much better on the stock market than the aggregate market index. Shown above is the stock price performance over the past 12 months of the Shanghai Composite Index versus the GXC, the large-cap China exchange-traded fund. The large cap, state-controlled stocks began to rally in September while the overall index was still in decline, and outperformed the overall index by a wide margin.

China’s deep pockets can source whatever technology the country requires. Can the Chinese put it to effective use?

In 2008, I observed that 35 million young Chinese were studying classical piano, not counting the string players, and almost entirely with private tuition. “The world’s largest country,” I wrote, “is well along the way to forming an intellectual elite on a scale that the world has never seen, and against which nothing in today’s world – surely not the overbred products of the Ivy League puppy mills – can compete. Few of its piano students will earn a living at the keyboard, to be sure, but many of the 36 million will become much better scientists, engineers, physicians, businessmen and military officers.” [2]

In the meantime we are beginning to see data about the quality of China’s students. The National Center for Education Statistics reports that in the Shanghai region of China, more than 50% of all secondary students scored at level 5 or above on the PISA mathematics proficiency tests. That compares to just 12.7% for the OECD average.

Students in Shanghai, to be sure, are likely to be better educated than students from the countryside, but the extremely strong showing there is indicative of where China is headed. After the Cultural Revolution, China’s university system was in ruins. In its aftermath, few doctoral degrees were awarded. Now the rate has caught up with the United States. We do not have accurate data on the distribution of degrees by field, but the vast majority of American doctorates are in non-STEM (science, technology, engineering, and mathematics) fields, whereas China concentrates on STEM.

Exhibit 3: Number of doctorates awarded in ChinaSource: Infonomics Society

The quality of Chinese engineering PhDs also remains to be tested. But there is no question that the Chinese labor force of 2012 bears little resemblance to the largely unskilled labor force of a dozen years ago. The world has never seen anything like the present wave of young, educated Chinese entering the job market.

China does not nurture disruptive innovators. The brightest and most engaging Chinese students one meets at American universities complain about the stultifying intellectual climate at home. That is beside the point. America hasn’t nurtured much innovation lately.

In the aftermath of the United States’ response to Sputnik, the US had an eruption of innovations: the microprocessor (invented in 1971), the LCD display (1971), the word processor (1972), video games (1972), laser printers (1975), the spreadsheet (1978), personal computers (1981), digital cell phones (1988), the World Wide Web (1990), among others. These items are picked from the inventors’ timeline page at About.com.

What has America invented since 1991? Again, according to About.com, the big items are: the digital answering machine, Web TV, the gas-powered fuel cell, the hybrid car, and, of course, Viagra. According to Professor Robert Gordon of Northwestern University, the world is simply out of ideas; the digital revolution has come and gone, and a technological trough is inevitable.

That ain’t necessarily so. There’s no technological trough in Israel, where innovations like the Iron Dome anti-rocket system get the full attention of the country’s best minds. That’s a matter for a longer discussion on a different occasion.

There is a simple way to measure the expected rate of disruptive innovations from America’s high-tech companies. That is the volatility (rolling standard deviation of returns) to the information and technology subindex of the S&P 500 index, versus the volatility of the index itself.

During the disruptive 1990s, the volatility of information technology companies was two to three times that of the overall index. Since 2007, though, the volatility of the tech sector has tracked index volatility with almost no deviation. Companies that offer disruptive technologies should be more volatile: their stock prices will rise sharply if they succeed, or crash if they fail. The fact that tech-sector volatility has disappeared tells us that investors no longer expect them to do anything disruptive.

In short, the United States does not have a tech sector. It has mature consumer businesses operating under the technology label. They walk like mature consumer businesses, quack like mature consumer businesses, and fly like mature consumer businesses. They are run by patent lawyers rather than engineers.

One might have expected more tongue-wagging after Israel’s Iron Dome system leapfrogged the contending American entries. The Wall Street Journal reported on November 26, 2012:

At the direction of a White House working group headed by then-National Security Council senior director Dan Shapiro (who today is the US ambassador to Israel), the Pentagon sent a team of missile-defense experts to Israel in September 2009 to re-evaluate Iron Dome. The decision raised eyebrows in some Pentagon circles. Iron Dome was still seen as a rival to the Phalanx system, and previous assessment teams had deemed Iron Dome inferior.

In its final report, presented to the White House in October, the team declared Iron Dome a success, and in many respects, superior to Phalanx. Tests showed it was hitting 80% of the targets, up from the low teens in the earlier US assessment. “They came in and basically said, ‘This looks much more promising … than our system,’” said Dennis Ross, who at the time was one of Mr Obama’s top Middle East advisers. [3]

Israel, with seven million people, did a better job than the United States in a critical field of advanced military technology. That should have prompted hand-wringing and gnashing of teeth. In 1957, after all, the mighty Soviet Union got the jump on America by sending Sputnik into orbit, and the US responded with an all-out mobilization of resources. Today, Israeli engineers beat the Pentagon from a standing start two years ago, and we read it in the jump page of the Wall Street Journal account.

The decline of the US is by no means inevitable. But its first stage is already underway. Unless the United States manages to create the sense of national purpose it had when Sputnik went up, it may become irreversible. The notion that America can somehow punish China through trade sanctions is silly. The only way to keep ahead of China is to innovate. By any other means, resistance is futile.

TEHRAN (FNA)- Turkish President Abdullah Gul said Ankara believes that Israel’s nuclear disarmament is necessary because it is key to the establishment of a nuclear-free Middle-East.

Speaking to Foreign Affairs magazine, President Gul stressed the importance of eradicating nuclear weapons in the Middle-East and stated that the atomic disarmament of Israel would be the key to resolving outstanding issues regarding Iran’s nuclear energy program.

“That is the way I see it. Because that route will help them solve the fundamental problems in the Middle-East that affect the whole world.”

That is also the policy of the Obama administration, which has been pushing a “nuclear-free Middle East” since the May 2010 United Nations conference on nuclear proliferation. On May 28, 2010, the US cast a “yes” vote for a resolution demanding that Israel adhere to the Nuclear Non-Proliferation Treaty, which would oblige Israel to unilaterally disarm. Israel’s longstanding policy of “nuclear ambiguity” was first adopted in 1969 by then Prime Minister Golda Meir at the request of the Nixon administration. Every American administration since Nixon has backed this policy–until Obama. Israeli Prime Minister Binyamin Netanyahu responded to the May 2010 turnaround by calling the UN resolution “deeply flawed and hypocritical,” adding, “It singles out Israel, the Middle East’s only true democracy and the only country threatened with annihilation. Yet the terrorist regime in Iran, which is racing to develop nuclear weapons and which openly threatens to wipe Israel off the map, is not even mentioned in the resolution.”

Obama’s action provoked a storm of protest, and the issue was quietly laid to rest. But it is far from dead. Reuters reported Nov. 24:

LONDON (Reuters) – Britain and the United Nations said on Saturday they hoped a conference aimed at trying to ban nuclear weapons in the Middle East could take place soon after the United States said it would not happen next month as originally planned.

If and when it happens, the conference is likely to be fraught as Iran and Arab states say Israel’s presumed nuclear arsenal is the main threat to security in the region, while Israel and the West see Tehran as the main proliferation danger.

Western diplomats and others believe the conference would make little headway because of that fundamental difference in opinion – something the United States has described as “a deep conceptual gap”.

However, Britain and the conference’s other organizers, which include Russia and the United Nations as well as prospective host Finland, believe it is worth a try anyway and anti-nuclear campaigners would also like to see it take place.

Middle East nuclear disarmament is America’s stated policy. The only question is how to make it happen. A former senior Israeli intelligence official told me that the Obama administration expects Iran to acquire nuclear weapons in the near future. At that point, the official predicted, Obama will propose that both Israel and Iran give up their nuclear arsenal.

After his re-election Obama has more “flexibility,” as he told Russian Prime Minister Dimitri Medvedev over an accidentally open microphone last March. Since the presidential election, the Obama administration has turned decisively against Israel:

1) Sat on its hands while the Palestine Authority obtained “observer status” at the United Nations, a setback that could not have occurred (as former UN ambassador John Bolton explained) if the US had used its diplomatic muscle to avert it, as in the past, and advised at least one country to vote for the UN resolution;

3) Denounced Israel for a “pattern of provocation action” that “puts peace further at risk” on Dec. 18–for planning additional homes in an area that every proposed peace agreement in the past twenty years has assigned to Israel, and after the Palestine Authority broke the cardinal rule of the Oslo Process by going to the UN rather than engaging in bilateral negotiations;

4) Proposed Sen. Chuck Hagel (R.-Nebraska) for Secretary of Defense, after “the sentiments he’s expressed about the Jewish lobby border on anti-Semitism,” according to the Anti-Defamation League.

Obama is a radical utopian who identifies deeply with so-called colonial peoples, as I argued back in February 2008 (and Dinesh D’Souza documented vividly in his 2012 film). The more his utopian policies fail–in Libya, Egypt, Syria, and of course Iran–the harder he will push them. Political constraints made him scrap the idea of Israeli nuclear disarmament in May 2010.. Now those constraints are gone. Israel’s friends in Congress will have to draw the line somewhere. The best place and time to draw the line is here and now, on the Hagel nomination.

Let’s cut through all the pious pronouncements about the horrible Assad regime in Syria. We err when we apply majoritarian democratic criteria to tribal societies. There is a reason that Syria has labored under brutal minority regimes for half a century, since the Ba’ath Party coup of 1963 led by the Christian Michel Aflaq, followed by the Alawite Assad dynasty’s assumption of power in 1971. If you create artificial states with substantial minorities, as British and French cartographers did after the First World War, the only possible stable government is a minority government. That is why the Alawites ran Syria and the minority Sunnis ran Iraq. The minority regime may be brutal, even horribly brutal, but this arrangement sets up a crude system of checks and balances. A government drawn from a minority of the population cannot attempt to exterminate the majority, so it must try to find a modus vivendi. The majority can in fact exterminate a minority. That is why a majority government represents an existential threat to the minority, and that is why minorities fight to the death.

Richelieu looked at me with what might have been contempt. “It is a simple exercise in logique. You had two Ba’athist states, one in Iraq and one in Syria. Both were ruled by minorities. The Assad family came from the Alawite minority Syria and oppressed the Sunnis, while Saddam Hussein came from the Sunni minority in Iraq and oppressed the Shi’ites.

It is a matter of calculation — what today you would call game theory. If you compose a state from antagonistic elements to begin with, the rulers must come from one of the minorities. All the minorities will then feel safe, and the majority knows that there is a limit to how badly a minority can oppress a majority. That is why the Ba’ath Party regimes in Iraq and Syria — tyrannies founded on the same principle – were mirror images of each other.”

“What happens if the majority rules?,” I asked.

“The moment you introduce majority rule in the tribal world,” the cardinal replied, “you destroy the natural equilibrium of oppression.

“The minorities have no recourse but to fight, perhaps to the death. In the case of Iraq, the presence of oil mitigates the problem.

The Shi’ites have the oil, but the Sunnis want some of the revenue, and it is easier for the Shi’ites to share the revenue than to kill the Sunnis. On the other hand, the problem is exacerbated by the presence of an aggressive neighbor who also wants the oil.”

“So civil war is more likely because of Iran?”

“Yes,” said the shade, “and not only in Iraq. Without support from Iran, the Syrian Alawites — barely an eighth of the people — could not hope to crush the Sunnis. Iran will back Assad and the Alawites until the end, because if the Sunnis come to power in Syria, it will make it harder for Iran to suppress the Sunnis in Iraq. As I said, it is a matter of simple logic. Next time you visit, bring a second bottle of Petrus, and my friend Descartes will draw a diagram for you.”

That, by the way, also explains the high incidence of atrocities. The really ugly developments of the past several weeks, including air attacks on civilians with mass casualties, probably are a calculated crime on the part of the Assad regime. Syria’s Alawites face the not-so-remote prospect of the end of their ethnic existence if a Sunni Muslim regime should accede to power. The Bashar al-Assad regime commits atrocities that are designed to be unforgivable, in order to persuade their base to fight to the end. In practice, that means holding out for an Alawi state on the Mediterranean nestled against the Turkish border. The Assad regime’s behavior resembles that of the Nazi regime, which went out of its way to ensure that the German population knew about its worst atrocities, the more to make them complicit in the crimes and persuade them to fight to the bitter end. Benjamin Schwarz of the The Atlantic reviewed new research supporting this interpretation in 2009, concluding, “New histories reveal that the Nazi Regime deliberately insinuated knowledge of the Final Solution, devilishly making Germans complicit in the crime and binding them, with guilt and dread, to their leaders.”